More ways parents can help adult children buy homes

Updated 8:21 am, Tuesday, July 15, 2014

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This May 14, 2014 photo shows a new home for sale in the Winthrop subdivision in Riverview, Fla. Freddie Mac reports on average U.S. mortgage rates for this week on Thursday, June 5, 2014. (AP Photo/Chris ... more

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FILE - In this Friday, Feb. 22, 2013 file photo, a sale pending announcement sits atop a for sale sign in a home's yard in Richardson, Texas. National Association of Realtors releases pending home sales index ... more

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More ways parents can help adult children buy homes

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My Sunday column described two ways parents can help their adult children buy a home - giving or lending them all or part of a down payment.

For parents who don't want to lose control of their money or want to share in the home's potential appreciation, there are other options.

One is buying a home with the child and going on title as a co-owner. This can get complex, especially if the child is getting a loan and the lender requires the parents to co-sign the mortgage if they want to be on title. Some do, some do not.

Andrew Sirkin, a San Francisco attorney who specializes in shared property ownership, thinks co-ownership can be a great idea. "With both people on title, the parent and the child, it allows the child to establish a credit history and get tax benefits of ownership, which wouldn't be available if the child was just renting. It also can generate tax benefits for the parent."

In a typical equity share, the parents and child both sign the loan and go on the title, either as tenants in common or joint tenants. The deal can be structured in a variety of ways, with the parent providing some or all of the down payment and the child paying some or all of the mortgage or other expenses. If they hold the property as joint tenants, their shares must be equal, but if they own as tenants in common, they can own unequal shares.

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Parent's credit record

If the parent wants to go in on the mortgage, the lender will take the parent's debt, income and credit score into account. "That's OK unless the parents have bad credit or no income," says Gordon Friedman, a loan officer with Mortgage Services Professionals.

Bill Purdy, a real estate and tax attorney in Soquel (Santa Cruz County), says buying a home with your kid is a usually a terrible idea.

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"The upside is that you are on title to the property and hopefully nothing can happen to it without your knowledge and consent," he says.

But if a parent co-signs a loan with a child and the child falls behind on payments, it could hurt the parent's credit rating. If the child defaults, the parent is responsible for the loan.

"Even if Mom and Dad have a 20 percent interest in the property, they are 100 percent liable for the debt," Purdy says.

"I am almost dead set against parents co-signing with their kids, especially if (the children) are married," he adds. "If there are marital dissolution problems, you have a lingering embrace with that lender until you sell or it is foreclosed upon. I have seen that go wrong over and over again."

Brett Gookin, director of wealth management with Aspiriant, says co-ownership "sounds fraught with peril. You are intertwining your financial life with your child's. As a business transaction, it sounds reasonable. But with families, there are these eddies under the surface. This could be the thing that sets the ancestral wounds off."

Another option is for the parents to buy the home themselves, with or without a mortgage, and rent it to the children.

"I like it," Purdy says. "It's an idea whose time has come."

The parents can give the children a lease with an option to buy, and structure it so their rent payments can be applied to purchase. "You own it, control it, and if they start to go sideways, god forbid, you kick them out," Purdy says.

When children exercise their option to buy, they can get a new loan to pay off the parents.

The parents also could turn over a portion of the home to the children in the form of a gift. There could be gift-tax implications, however, depending on how much they gave each year. (For more on the gift tax, see my Sunday column at http://bit.ly/1oAWNQw.)

Structuring loans

National Family Mortgage helps people structure legitimate intra-family loans. "With respect to home buying ... most of our loans are down payment loans, let's say $50,000, that parents want to structure as a tax-deductible second mortgage that complements the primary financing," chief executive Timothy Burke says.

But it also helps parents who want to diversify their investments and provide all the financing for a child's home loan. "That is pretty popular in the bigger cities like San Francisco and Los Angeles," he says.

National Family charges $725 to structure the note and register it with the proper government authorities. It also offers an optional loan-servicing platform that will send out monthly statements, collect payments and send out year-end tax forms.

For parents with a lot money, and tax and legal help, there are other ways to help children buy houses. "If you want to get complex, there are different kinds of trusts you can set up to protect the house from creditors, ex-spouses and even minimize estate taxes," Gookin says.

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